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(Z1) Off Lows, But Remains Weak


Still Vulnerable

MNI (London)
--Riksbank MonPol Remains Expansionary, Small December QE Increase
--Greater Concerns Over Effect Lower Rather than Higher Infla
--Limited Risks To Krona From Any Rate Hike Before ECB
By Kieran Williams
     LONDON (MNI) - A rate hike in Sweden before the European Central Bank
starts to tighten remains the most likely scenario although downside
inflationary surprises could still divert that path, Riksbank Deputy Governor
Martin Floden told MNI in an exclusive interview. 
     Pushing back against the financial markets interpretation of the latest
Riksbank minutes as being unduly hawkish, Floden noted that monetary policy
remains expansionary and that the repo rate path implies only very gradual hikes
over the next 3 years. 
     "Policy was left unchanged and discussion on the Riksbank was mainly around
small details in an expansionary direction," said Floden, pointing to the
decision to bring forward coupon and maturity reinvestment from Riksbank held
bonds from January 2018 though to June 2019 -- something he saw as a de facto
extension of QE.
     Although some Riksbank board members, notably Deputy Governor Henry
Ohlsson, indicated in the latest minutes they believe that inflation
expectations are firmly anchored Floden thinks that inflation is more fragile.
     "There are risks to the rate path, inflation in particular is unusually
uncertain," Floden noted. 
     The central bank expects inflation to bounce after dropping back below the
2% central target in December, after hitting a peak of 2.4% in July. 
     A substantial decline in inflation could alter the repo rate path, said
Floden, adding he was more worried about the effects of a drop in inflation than
a rise. Floden adopted the common central banker mantra that any action is data
dependent. "It would depend on why inflation was lower than expected and how
that affects inflation forecasts."
     There is a wide dispersion of market inflation estimates, some below, some
above the Riksbank. Nordea and NIER are two of the more pessimistic forecasters,
both expecting CPIF to drop below 1.5% in 2018.
     Floden noted that Sweden had come much further in its economic recovery
than the broader eurozone, with inflation (CPIF) at 1.9% in December, compared
to January's preliminary 1.3% across the single currency bloc reported by
Eurostat this week.
     Another risk to the rate path is "development in the housing market,
especially construction and household sentiment more broadly." The construction
sector has been strong in Sweden, and has been one of the primary drivers of
recent GDP strength.
     However, Floden is optimistic of a soft landing in the housing market. "The
fundamentals remain strong" argued Floden, "there is shortage of housing in big
cities in particular, demand remains high due to low supply in previous years."
     Although some analysts have warned of upside risk for the Swedish krona if
the Riksbank moved before the ECB, Floden was more relaxed.
     He believes that risks to the Swedish krona are limited if the Riksbank
were to hike before the ECB. 
     "The impact on the krona need not be substantial, there may be no impact at
all" said Floden, adducing the market repo path already expects the Riksbank to
hike in Q3 2018 against the market expectation of the first ECB hike in March
2019 according to MNI PINCH calculations.
     This, Floden argued, is because market expectations are in-line with the
Riksbank's own forecasts, so any strength in the krona is largely already priced
in by markets.
     Positive international developments, in particular in the Eurozone, are a
boon to the Swedish economy said Floden, with Sweden an export oriented market
economy. The main export partners are Germany and the U.S., so strength in these
economies helps drive Sweden's growth. A stronger krona could help boost the
export sector, provided the resurgent demand from the eurozone remains in place.
     He noted Brexit could be an issue for the Swedish economy, as the UK is a
leading trading partner.
     "If there is a hard Brexit then problems with new trade restrictions may
not be good for the Swedish economy," he said.
--MNI London Bureau; tel: +44 203-586-2225; email:
--MNI London Bureau; +44 203 865 3809; email:
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